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by OneClass334

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School

University of Toronto St. George

Department

Economics

Course Code

ECO100Y1

Professor

W.G.Wolfson

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ECO100Y1d.doc

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Lecture #22 – Monday, March 29, 2004

ADVANCES FROM THE BANK OF CANADA

Suppose the reserve rates at the chartered banks fall below the desired ratio. They borrow funds from the

Bank of Canada:

Chartered Banks

Reserves: +100 (DD at

Bank of Canada)

Advances from Bank of

Canada: +100

Bank of Canada

Advances to Chartered

Banks: +100

DD: +100 (Chartered

Banks)

• No direct increase in the money supply – rare case, usually repaid quickly.

• Bank Rate: Interest rate charged by the Bank of Canada for advances.

• Reflects the short-term interest rates – influences the interest rates.

• Can either encourage/discourage banks to keep reserves – indirectly expand or contract money

supply.

FOREIGN EXCHANGE MARKET

Canadian Dollars Foreign Exchange

Import ↑: Supply ↑ Demand ↑

Export ↑: Demand ↑ Supply ↑

Capital Inflow ↑: Demand ↑ Supply ↑

Capital Outflow ↑: Supply ↑ Demand ↑

EXCHANGE RATE SYSTEMS

Consider a rise in Can/F. Foreign exchange is

now more valuable:

• S is positively sloped: X↑, FE supplied ↑.

• D is negatively sloped: M↓, FE demanded ↓.

• Depreciation in Canadian dollars.

Flexible Exchange Rates

Government doesn’t intervene – demand and supply determine the exchange rate.

Can/F

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ECO100Y1d.doc Lecture #22 Monday, March 29, 2004 A DVANCES FROM T HE BANK OF CANADA Suppose the reserve rates at the chartered banks fall below the desired ratio. They borrow funds from the Bank of Canada: Chartered Banks Bank of Canada Reserves: +100 (DD at Advances from Bank of Advances to Chartered DD: +100 (Chartered Bank of Canada) Canada: +100 Banks: +100 Banks) No direct increase in the money supply rare case, usually repaid quickly. Bank Rate: Interest rate charged by the Bank of Canada for advances. Reflects the short-term interest rates influences the interest rates. Can either encouragediscourage banks to keep reserves indirectly expand or contract money supply. FOREIGN E XCHANGE M ARKET Canadian Dollars Foreign Exchange Import : Supply

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